House Diversity Panel a Doubled-Edged Sword for Banks

January 7, 2019

American Banker
By Neil Haggerty

A new House subcommittee planned by Democrats to focus on diversity in banking and financial inclusion is getting high marks not just from public interest groups but also industry groups that say it could foster regulatory reforms needed to reach more customers.

The exact details of the new panel, which was proposed by House Financial Services Committee Chair Maxine Waters, D-Calif., are still somewhat unclear, but observers expect the subcommittee will address diversity issues among bank and regulator leadership, fair lending and reducing other forms of discrimination, and expanding financial services access to communities.

A key focus is expected to be the dearth of women and minority representation on bank boards. But industry representatives hope also to draw attention to regulatory barriers that they say impedes financial institutions from catering to customers in lower-income and rural areas.

“We are all for getting consumers into the banking sector and providing financial services at a reasonable price and preventing them from getting tripped up by other nonbank sources,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America. “A lot of the regulations designed to help the consumer actually boxed the consumer out of access to products and services.”

The new Financial Services subcommittee – included in a package of rule changes unveiled by Democratic leadership and passed by the full House last week – will likely enable Democrats to raise the alarm bell about the lack of diversity in the banking industry.

“We think that there is a major disparity in” in the lack of “people of color at the top of these banks,” said Rawan Elhalaby, the Economic Equity program manager at the Greenlining Institute. She added that “requiring that the banks disclose who is on their boards and the diversity of their workforce … is important and will influence the banks to make better decisions about their hiring.”

That could pose an uncomfortable situation for specific institutions that the panel chooses to spotlight. Democrats on the full House committee have long pushed for more diversity both at the executive and board levels of corporations and at regulatory agencies, including the Federal Reserve Board and the Fed’s regional banks.

“The committee is going to draw a lot of public attention to organizations that it doesn’t believe are taking appropriate steps to diversify their leadership,” said Justin Schardin, a fellow at the Bipartisan Policy Center.

Waters has said she intends to expose and eliminate discrimination in financial services.

“We believe that not only are we going to be able to define very clearly for everybody where there is discrimination but also have recommendations and try to work with all of the entities that are involved to eliminate it,” she said in a statement to Vox.

The new subcommittee has not been officially formed, but Rep. Joyce Beatty, D-Ohio, has already put her name in the running to chair it.

“Still today, too many Americans have been left behind as our economy recovered from the 2008 Financial Crisis, especially communities of color,” Beatty said in a statement to American Banker. “Congress must do more to ensure ALL Americans have a voice, seat at the table, and equal opportunity at achieving the American Dream.”

Even if the new subcommittee fails to pass legislation, it will likely put pressure on banks to ensure they have systems in place that prevent discrimination.

“If I were a lobbyist or if I were a corporation, you want to pay a lot of attention to this because you want to avoid being singled out by this,” said Ed Mills, a policy analyst at Raymond James. “There is going to be a lot of work behind trying to get your company not to testify before this subcommittee. A lot of times, the most effective lobbying tool is shame.”

The panel could present an opportunity for both consumer advocates and reg relief champions to tout proposals aimed at improving the industry’s approach to diversity and financial inclusion.

Policy areas that could be of focus include reforming the Community Reinvestment Act, ensuring that new fintech products are not discriminatory and instituting possible reforms to the Home Mortgage Disclosure Act.

While the subcommittee could be an outlet for Democrats to criticize discriminatory policies, it could also be an outlet to push for further regulatory relief to expand product access.

For example, just as consumer groups want the CRA reform effort to result in strict oversight of banks to ensure they are meeting their community obligations, banks have urged policymakers to look at areas where they can earn CRA credit where they currently do not.

“We hear from our bankers that they are doing all kinds of services in their communities because it is part of their business model but a lot of it may or may not count for CRA credit,” Merski said.

The subcommittee could also present an opportunity for bankers to highlight where the industry’s diversity initiatives are succeeding.

“The banking industry strives for a diverse and inclusive workforce and is proud of the progress we have made and the work already being done in communities across the country,” Richard Hunt, president and chief executive of the Consumer Bankers Association.

Lauren Saunders, the associate director of the National Consumer Law Center, said the development of fintech products is also an area for stakeholders to argue two sides: how digital innovation can expand product access but also how certain business models have the potential to discriminate.

“I do expect fintech to be a topic of conversation,” Saunders said. “There are definitely positive assets to fintech and promises of increasing inclusion … but you could have issues with disparate impact. ” Just because a computer does it, doesn’t mean they’re not discriminating. I would hope that this new committee would shine a light on those black boxes.”

She said she hopes that the new subcommittee will focus on strict enforcement of anti-discrimination laws.

“Regulators who are in charge of enforcing our fair-lending laws need to be doing their job. Anyone who thinks there’s not discrimination out there anymore either is buried in a hole or doesn’t care,” Saunders said. “There’s both human discrimination and I think there’s a lot of potential for discrimination in automated approaches as well.”

Other observers say Trump-appointed regulators could also draw scrutiny from the subcommittee over whether they are helping or hindering diversity efforts in the industry.

Recent appointees have already felt heat from Democrats for their statements or policies. Shortly after taking office, Comptroller of the Currency Joseph Otting alarmed lawmakersduring a hearingwhen he said he has “never personally observed” discrimination in banking “but many of my friends from the inner city across America will tell me that it is evident today.”

Democrats also criticized steps by the Consumer Financial Protection Bureau, under former acting Director Mick Mulvaney, to revamp its approach to fair-lending enforcement. The bureau has also been embroiled in controversy overracially charged commentsthat the political appointee overseeing fair-lending policy made in a blog 14 years ago.

“The very first step for this committee is going to be oversight and investigations,” said Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG.